by David Switzer & Manuel P. Teodoro
Democratic governments provide a range of goods and services as “public enterprises” that recover all or part of their costs through user charges. Unlike commercial firms, which set prices in a competitive market, public enterprise pricing is a matter of public policy. This article explores public enterprise pricing as a redistributive policy, with governments setting prices more or less progressively depending on income inequality and larger electoral considerations.
Drawing on Cukierman and Meltzer’s (1991) taxation model, the authors analyze water utility prices in the United States to advance the theory that public enterprise pricing reflects the politics of inequality. Cukierman and Meltzer’s model suggests that income taxes are more progressive where the gap between average and median income is larger because elections incentivize politicians to redistribute government costs away from the median voter and toward higher-income citizens.
This study adapts and applies the theory to water utility pricing in the United States, showing how the same logic of citizen electoral behavior determines public enterprise pricing. Noting that larger homes and residential lots consume more water for discretionary uses like lawn irrigation, Switzer & Teodoro link income inequality to the structure of residential service prices with two hypotheses:
- Water utilities that serve areas with higher income inequality have more progressive price structures.
- The relationship between income inequality and rate progressivity is stronger for government-owned utilities than for investor-owned utilities.
The authors use regression models to evaluate the relationship between income inequality (mean-to-median ratio) and water price progressivity across 1,183 water utilities. They measure water rate progressivity using the Unit Price Ratio (UPR), which compares the average price paid per unit of water by a high-volume user to that paid by a low-volume user. A UPR greater than 1.0 indicates a progressive rate structure where high-volume users pay a higher unit price, while a UPR less than 1.0 signifies a regressive structure where high-volume users pay less per unit. This ratio provides a simple, continuous measure to assess how utility pricing policies distribute costs across different levels of water consumption.
Figure 1 plots standardized coefficients from their model to visualize the relationship between income inequality and price progressivity. The results show that the mean-to-median income ratio correlates strongly and positively with water rate progressivity. This finding suggests that governments adopt more progressive water rate structures where income inequality is higher, consistent with the political logic of redistributive policy and thus supports hypothesis 1.
Figure 1. Standardized coefficients from model predicting water price progressivity. Thin bars represent 95% confidence intervals.
Comparative analysis of pricing for government vs. investor-owned utilities further illustrates the political logic at work. The Cukierman-Meltzer hypothesis applies to local government water utilities, where tariff schedules are set by local elected officials. Investor-owned utilities and the regulatory commissions that set their rates are not directly accountable to voters, and so the hypothesized relationship between income inequality and pricing should be stronger where governments run water utilities.
To test that conditional relationship, Figure 2 adds an interaction term to the statistical model.. Consistent with the political logic of rate design, the results show that local income inequality correlates positively with water utility price progressive for government utilities, but not for investor-owned utilities.
Figure 2. Estimated unit price ratios (UPR) at 30,000 gallons over income inequality by utility ownership. Dashed lines represent 95% confidence intervals.
In analyzing water utility structures as a form of redistributive policy, this article demonstrates that public enterprise pricing is shaped by democratic institutions and thereby subject to the same electoral considerations as taxation. The authors call on scholars to apply political economy models to other public enterprises where governments charge fees for service, such as hospitals, universities, and transit. Theories of comparative political economy may prove useful in understanding the politics of public enterprise management, quality, and performance.
Read the original article in Policy Studies Journal:
Switzer, David and Manuel P. Teodoro 2025. “Public Enterprise Pricing As Redistributive Policy.” Policy Studies Journal 53(2): 365–387. https://doi.org/10.1111/psj.70017.
About the Authors
David Switzer is an Associate Professor at the University of Missouri’s Truman School of Government and Public Affairs. His work focuses on how political and administrative variables shape the implementation and development of environmental policy at the local level in the United States. He received his Ph.D. in Political Science from Texas A&M University.
Manuel P. Teodoro is Robert F. & Sylvia T. Wagner Professor at the La Follette School of Public Affairs, University of Wisconsin-Madison. He studies public management and environmental policy, with an emphasis on water in the United States. He received his Ph.D. in Political Science & Public Policy at the University of Michigan.
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